Ka Keung Ceajer Chan

An exploratory investigation of the firm size effect

Abstract We investigate the firm size effect for the period 1958 to 1977 in the framework of a multi-factor pricing model. The risk-adjusted difference in returns between the top five percent and the bottom five percent of the NYSE firms is about one to two percent a year, a drop from about twelve percent per year before risk adjustment. The variable most responsible for the adjustment is the sensitivity of asset returns to the changing risk premium, measured by the return difference between low-grade bonds and long-term government bonds.

Global Financial Markets and the Risk Premium on U.S. Equity

We document that there is a significant foreign influence on the risk premium of U.S. assets. Using a bivariate GARCH-in-mean process for conditional expected excess returns, we find that the conditional expected excess return on U.S. stocks is positively related to the conditional covariance of the return of these stocks with the return on a foreign index but is not related to its own conditional variance. Further, we are unable to reject the international version of the CAPM. Evidence is presented for different model specifications, multiple-day returns and alternative proxies of foreign stock returns including the Nikkei 225 Stock Average, Morgan Stanley Japan and Morgan Stanley EAFE indices.

Risk and the economy: a finance perspective

In their introduction to a recent conference volume, Brunner and Meltzer identify “the integration of risk and uncertainty, a standard feature of research in finance, into the type of general equilibrium models used by macroeconomists” as one of the “major areas of interest to macroeconomists in the years ahead.”1 Macroeconomists are concerned with the economy as a whole and changes in risk and uncertainty affect the economy as a whole. While macroeconomists were always aware of this simple truth, they are now more likely to act on it and to take it into account explicitly in their models. The Lucas critique has convinced many of them of the necessity of building their models on the actions of optimizing households. Unless households are risk-neutral, changes in risk affect their consumption and investment plans, and hence have macroeconomic implications.